EAC-EU Economic Partnership Agreement (EPA) On Course

Published on 28th May 2012

The Secretary General of the East Africa Community Amb. Dr. Richard Sezibera has reaffirmed that negotiations for the EAC-EU Economic Partnership Agreement (EPA) are on course and hailed the talks as "the first time in history that the EAC Partner States were negotiating terms of reciprocal trade arrangement with Europe as a bloc."

While responding to questions from the Media after the presentation of the EAC Budget Estimates for the Financial Year 2012/2013 to the East African Legislative Assembly, Amb. Sezibera said unlike the previous arrangements under the Lome and the Cotonou agreements, which were unilateral arrangements whose terms and conditions were decided by the European Union, the EPA will create some level of predictability and transparency in the trade regime between EU and EAC.

The Secretary General noted that in addition, under the Everything But Arms (EBA) preference scheme for Least Developed Countries, countries were assessed periodically to ascertain whether they remain eligible to benefit from the EBA.

Moreover, there were stringent Rules of Origin (RoO) under the EBA, which makes it challenging for countries to effectively utilize this market access opportunity. In addition, Sanitary and Phytosanitary (SPS) and Technical Barriers to Trade (TBT) measures are non-negotiable.

The Secretary General reiterated that in light of this, the EPA has the potential to consolidate the EU market for EAC's exports. He reaffirmed that the EU market was still one of the significant export destinations for the region's agricultural products since it offers the option to access a high price market that is considerably protected.

The EPA Rules of Origin are expected to be simple, flexible and asymmetrical to take into account the different levels of development between both Parties. It allows for single transformation of textiles and cumulation with all the countries that the EU has concluded or will conclude a Free Trade Agreement.

The Secretary General reaffirmed the EAC Partner States commitment to concluding the EPAs that promote the interests of the region. Below are some of the highlights of the Secretary General's response to the several issues raised by the media on EPA:

Market Access

The EU Market Access offer, whose implementation began on the 1st January 2008 consists of duty free and quota free access for all EAC exports to EU, except for arms and ammunition. EAC products that attracted tariffs into the EU under the Cotonou Partnership Agreement are now zero-rated.

On the other hand, the EAC Market Access offer consists of liberalization of 82.6% of imports from the EU over a twenty five (25) year transition period. EAC is the only African region in which all signatories have identical schedules. These are all based on reductions from the EAC Common External Tariff (CET).

This liberalization will occur in three phases, with the first phase from 2010 involving only products with a current CET of zero percent. Thus products covered in this phase do not attract any import taxes under the EAC Customs Union (raw materials or capital goods). This constitutes 65.4% of EAC's imports under this regime are from the EU currently. The second phase will be between 2015 and 2023, where EAC Partner States will liberalize a further 14.6%. Products in this category are intermediate inputs and attract 10% duty. These intermediate products are critical for the EAC Industrialization Strategy.

The third phase will be between 2020 and 2033, where the EAC Partner States will liberalize a further 2.6% of its imports from the EU. This phase includes finished products whose availability at lower cost was deemed to have a positive effect on consumer welfare, and not to have a potentially negative impact on EAC economies.

Therefore, until 2033, the EAC will effectively liberalize only 17.2 % of products deemed critical for Industrialization or consumer welfare.

It is important to take note that approximately, one-fifth (17.4%) of EAC imports from the EU is excluded from liberalization commitments under the EPA. These products constitute the EAC Exclusion List (including the list of sensitive products under the CET).

The criteria for including products on this list included: the contribution to rural development; employment; livelihood sustainability; promotion of food security; fostering infant industries; contribution to government revenues.

Products which were deemed to contribute or to have a potential to contribute to increased production and trade competitiveness were excluded from the list as well as well as all products subsidized by EU are on this list.

The EAC Partner States have negotiated for policy flexibility for revision of the tariff lines liberalized under the EPA. Further, the EAC and the EU have agreed to review the Agreement after every five years.

The EPA contains provisions on trade defence instruments that would give EAC the opportunity to impose measures in cases where EU imports were to increase in such quantities that they would threaten domestic producers and industry. These include:

Bilateral and multilateral safeguards (including pre-emptive safeguards - where in exceptional circumstances require immediate action, i.e. for food security); Infant industry protection measures i.e. EAC can impose non-tariff measures or re-introduce Most Favored Nation (MFN) tariff for up to a period of 10 years with the possibility of a five year extension; and antidumping and countervailing measures.

Other Market Access areas such as Customs and Trade Facilitation; Technical Barriers to Trade, Sanitary and Phytosanitary Measures have been agreed upon and finalized.

Status of Negotiations

Upon initialing the Framework EPA on 27 November 2007, the EAC Partner States and the EU reviewed various Articles of the FEPA. Most of these Articles, known as the "contentious" issues, have been the subject of extensive debate between both Parties and remain outstanding.

These issues include: Export taxes and the MFN clause. Negotiations are also ongoing in the following clusters: Economic and Development; Agriculture; Rules of Origin; and Institutional Arrangements, Dispute Settlement and Final Provisions. Both Parties have agreed to negotiate Trade in Services and Trade Related Issues at a later stage.

Economic and Development Cooperation (EDC)

The Economic and Development Cooperation (EDC) provisions are part of the EPAs in recognition of the fact that changes to the trade regime will entail significant costs for the EAC. The EAC Partner States would like to ensure that additional resources are made available to assist them address the supply side constraints so that they can take advantage of opportunities stemming from implementation of the EPA Agreement.

Two critical issues remain outstanding under the EDC namely, annexing the EAC EPA Development Matrix and when to develop Benchmarks, Indicators and Targets for Monitoring the Implementation of the EPA Agreement. The EAC EPA Development Matrix contains the key regional projects for the EAC Partner States, which if undertaken will resolve some of the supply side constraints of the EAC Partner States.

Agriculture

The EAC Partner States recognize the importance of agriculture in EAC Partner States economies, as the main source of livelihood for the majority of the region's population, as the primary factor to ensure food and nutrition security, potential sector for high growth and value-addition and a source of export earnings.

They recognize the importance of supporting agricultural production, promotion of value addition, agricultural trade and market development initiatives through appropriate instruments and provision of appropriate regulatory framework to respond to changing market conditions. On the negotiations under Agriculture, outstanding issues remain on the following: domestic support and export subsidies; and on geographical indications.

Rules of Origin (RoO)

The cornerstone of the EPA RoO is the principle of asymmetry that reflects the differential level of development between the EAC and the EU. The negotiations on RoO are guided by the following objectives:

1.Improving and increasing the market access for EAC exports into the EU market;

2.Promoting the establishment and growth of the industrial and agricultural base of EAC Partner States;

3.Facilitating the diversification of the EAC export base;

4.Deepening EAC regional integration through cumulation across EAC as well with COMESA and SADC countries;

5.Widen EAC Partner States base for sourcing raw materials for production of goods targeting the EU market by allowing for extended cumulation that covers all ACP countries, countries that the EU has concluded an FTA with and cumulation withgoods that e nter the EU market at an MFN duty rate of 0%; and

The EAC-EU EPA RoO are contained in Protocol No. 1 with all its annexes, which include Annex II that spells out specific rules to apply for products manufactured using non-originating raw material.

Current negotiations on the RoO are focused on rules applicable to EAC exports to the EU. The EAC negotiating position on the RoO has been derived from Industry consultations at the Partner States level, EAC Protocol on RoO and General System of Preferences (GSP) Rules.

The EAC Partner States and the EU have agreed to undertake further work on Protocol No 1 and the Annexes.

1.Establish institutions which will ensure the achievement of the objectives of the EPA Agreement; and

2.Help avoid disputes and to settle any dispute between the Parties concerning the interpretation and application of the Agreement in good faith and to arrive at, where possible, a mutually agreed solution. Negotiations are ongoing in this regard.

Trade, Environment and Sustainable Development

The EU has submitted a text on Trade, Environment and Sustainable Development (TESD). The EU proposal includes commitments to develop measures on environmental issues, social issues and labour standards including scope of the cooperation and institutional arrangements.

The EAC has made its position clear to the EU that TESD is one of the Trade Related Issues (TRI) for which both Parties had agreed that TRI along with Trade in Services be negotiated at a later stage. The EAC has also pointed out to the EU that discussion of this item will prolong the negotiation period and delay the conclusion of the core negotiation issues.

New Issues submitted by the EU

In November 2011, the EU proposed two new issues to be included in the negotiations, namely, Good Governance in the Tax Area; and Obligations/Consequences from Customs Union Agreements concluded with EU. The EAC has not agreed to the inclusion of these issues in the negotiations.

Implications of EAC's Market Access Offer on their Agricultural Development The agricultural products in which the EAC are competitive in producing (or have the potential) are hardly affected by the EPA as these have largely been excluded from liberalization. This position was motivated by need to address food security and rural livelihood.

The EAC will be liberalizing seven agricultural items (six products attracting 10% and one product at 25%) which are currently significantly sourced from the EU, hence the potential loss of revenue. These are: 1) Maize starch; 2) Flours and meals of soya beans; 3) Sea weeds and other algae; 4) Animal food preparations; 5) Casein; 6) Other modified starches; 7) Colza Oil.

Implications of EAC's Market Access Offer on their Tariff Revenue EAC liberalization is based on its CET. 65.4% of the value of imports from the EC is already at zero tariff under the EAC CET (industrial inputs and capital goods) and 17.4% of the value of imports from the EU is excluded from liberalization. In effect therefore, the EAC is liberalizing only 17.2% of its imports (14.6% +2.6%) from the EU over the course of 25 years. This gives EAC a good period of time with which to adjust.

It is important to note that with the advent of the EAC Customs Union, EAC's dependence on customs duties as a source of revenue has declined. Focus is shifting to domestic sources of revenue such as sales taxes. Under the EPA, the envisaged revenue loss from the liberalization of the intermediate and finished products has been mitigated by a negotiated phase-in period that commences 2015 to 2033.

The revenue loss is expected to be offset by gains from enhanced competitiveness triggered by the reduction in the tariffs of intermediate products. Thus revenue is expected to be generated from domestic taxes as a result of increased trade.

Further, development cooperation from the EU provides an opportunity to mitigate the face value of the losses from the liberalization.

Proposed Amendment To EC Market Access Regulation 1528 /2007In September 2011, the EU made a proposal to amend its Market Access Regulation 1528/2007. The EC Market Access Regulation 1528/2007 is a temporary, unilateral instrument of the EU to ensure that, pending implementation of the EPAs there will be no trade disruption i.e. it provides for duty free quota free to countries having signed and/or initialed EPA.

The proposal to amend consist of a deadline of 2013 to provisional application of the EPA trade preferences for those countries that initialed an EPA but had not signed or taken the necessary steps to ratify it, regardless of whether contentious issues have been resolved or the EPA is completed. This would mean that countries that had not initialed or taken steps to ratify would lose preferences under the EPA as from 1 January 2014.

The EAC Partner States recall and reiterate the common position reached by the ACP Council of Ministers in December 2011, which insists that the proposed amendment should be withdrawn as negotiations continue. The objective is to ensure that all the contentious issues are resolved and that the EPA promotes development interests of the EAC. Therefore until the negotiations are concluded the planned withdrawal should not be enforced.